us internal revenue service: p590--2000

8/14/2019 US Internal Revenue Service: p590--2000

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ContentsImportant Changes ............................................ 2

Important Reminders ......................................... 2

Introduction ........................................................ 2

1. Traditional IRAs ............................................. 3What Is a Traditional IRA? .............................. 4

Who Can Set Up a Traditional IRA? ............... 4When Can a Traditional IRA Be Set Up? ....... 4How Can a Traditional IRA Be Set Up? .......... 4What If I Inherit an IRA? .................................. 5How Much Can Be Contributed? ..................... 6When Can Contributions Be Made? ................ 7How Much Can I Deduct? ............................... 7Can I Move Retirement Plan Assets? ............. 14When Can I Withdraw or Use IRA Assets? .... 19Are Distributions Taxable? .............................. 26What Acts Result in Penalties? ....................... 32

2. Roth IRAs ........................................................ 36

What Is a Roth IRA? ....................................... 36Can I Contribute to a Roth IRA? ..................... 37Can I Move Amounts Into a Roth IRA? .......... 39Are Distributions From My Roth IRA Taxable? 43

3. Education IRA(s) ............................................ 46What Is an Education IRA? ............................. 46Contributions .................................................... 47Rollovers and Other Transfers ........................ 48Withdrawals ..................................................... 49

4. Simplified Employee Pension (SEP) ............ 50What Is a SEP? ............................................... 51How Much Can Be Contributed on My Behalf? 51

Salary Reduction Arrangement ....................... 53When Can I Withdraw or Use Assets? ........... 53

5. Savings Incentive Match Plans forEmployees (SIMPLE) .................................. 54

What Is a SIMPLE Plan? ................................. 54How Are Contributions Made? ........................ 54How Much Can Be Contributed on My Behalf? 55When Can I Withdraw or Use Assets? ........... 56

6. How To Get Tax Help .................................... 56

Appendices ......................................................... 59Appendix A. Summary Record of Traditional

IRA(s) for 2000 and Worksheet forDetermining Required AnnualDistributions .............................................. 60

Appendix B. Worksheets for Social SecurityRecipients Who Contribute to an IRA ...... 61

Appendix C. Filled-in Forms 5329 ................... 71Appendix D. Filled-in Forms 8606 ................... 73Appendix E. Life Expectancy and Applicable

Divisor Tables ........................................... 75Appendix F. IRAs Contribution/Distribution

Quick Reference Chart ............................. 81

Index .................................................................... 82

Department of the TreasuryInternal Revenue Service

Publication 59 0Cat. No. 15160x

IndividualRetirementArrangements(IRAs)(Inc luding Roth IRAsand Educa tion IRAs)

For use in preparing

2000 Returns


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Important Changes

Modified AGI limit for traditional IRA contributionsincreased. For 2000, if you are covered by a retire-ment plan at work, your deduction for contributions toa traditional IRA will be reduced (phased out) if yourmodified adjusted gross income (AGI) is between:

$52,000 and $62,000 for a married couple filing ajoint return or a qualifying widow(er),

$32,000 and $42,000 for a single individual or headof household, or

$0 and $10,000 for a married individual filing aseparate return.

For all filing statuses other than married filing a sepa-rate return, the upper and lower limits of the phaseoutrange increased by $1,000. See How Much Can I De-duct?in chapter 1.

New method for calculating net income takeslosses into account. A new method for calculating netincome associated with returned contributions and re-characterized contributions allows net income to be anegative amount. If no deduction is claimed for a con-tribution, there is no penalty if you withdraw the contri-bution or if you recharacterize it and withdraw ortransfer (in the case of a recharacterization) any netincome earned on the contribution by the due date ofyour return (including extensions) for the year. Prior to2000, if your contribution suffered a loss while it was inan IRA, it was only taken into account in calculating netincome for purposes of a recharacterization.

Beginning in 2000, the new calculation method al-lows you to take into account any loss on a returnedor recharacterized contribution while it was in the IRAwhen calculating the amount of net income that mustbe withdrawn or recharacterized. If there was a loss ineither case, net income may be a negative amount. SeeExcess Contributions Withdrawn by Due Date of Returnin Chapter 1 and Recharacterizationsin Chapter 2.

Photographs of missing children. The Internal Rev-enue Service is a proud partner with the National Cen-ter for Missing and Exploited Children. Photographs ofmissing children selected by the Center may appear inthis publication on pages that would otherwise be blank.

You can help bring these children home by looking atthe photographs and calling 1800THELOST(18008435678) if you recognize a child.

Important Reminders

IRA interest earned. Although interest earned fromyour IRA is generally not taxed in the year earned, it isnot tax-exemptinterest. Do notreport this interest onyour return as tax-exempt interest.

Penalty for failure to file Form 8606. If you makenondeductible contributions to a traditional IRA and youdo not file Form 8606, Nondeductible IRAs, with yourtax return, you may have to pay a $50 penalty.

Contributions to spousal IRAs. In the case of amarried couple filing a joint return, up to $2,000 can becontributed to IRAs (other than SIMPLE and educationIRAs) on behalf of each spouse, even if one spousehas little or no compensation. See Spousal IRA limit

under How Much Can Be Contributed?in chapter 1.

Spouse covered by employer plan. If you are notcovered by an employer retirement plan and you file a

joint return, you may be able to deduct all of your con-tributions to a traditional IRA even if your spouse iscovered by a plan.

See How Much Can I Deduct?in chapter 1.

No additional tax on early distributions from tradi-tional or Roth IRAs for higher education expenses.You can take distributions from your traditional or RothIRA for qualified higher education expenses withouthaving to pay the 10% additional tax on early distribu-

tions.For traditional IRAs, see Higher education expenses

under Age 591/2 Rulein chapter 1.For Roth IRAs, see Additional Tax on Early Distri-

butions under What Distributions Are Not QualifiedDistributions in chapter 2.

No additional tax on early distributions from tradi-tional or Roth IRAs for first home. You can takedistributions of up to $10,000 from your traditional orRoth IRA to buy, build, or rebuild a first home withouthaving to pay the 10% additional tax on early distribu-tions.

For traditional IRAs, see First homeunder Age 591/2Rule in chapter 1. For Roth IRAs, see What Are Qual-ified Distributions?in chapter 2.

Roth IRA. You may be able to establish and contributeto a Roth IRA. You cannot claim a deduction for anycontributions to a Roth IRA. But, if you satisfy the re-quirements, all earnings are tax free and neither yournondeductible contributions nor any earnings on themare taxable when you withdraw them. See chapter 2.

Education IRA. You may be able to make non-deductible contributions of up to $500 annually to aneducation IRA for a child under age 18. Earnings in the

IRA accumulate free of income tax. See chapter 3.

IntroductionAn individual retirement arrangement (IRA) is a per-sonal savings plan that offers you tax advantages toset aside money for your retirement or, in some plans,for certain education expenses. Two advantages of anIRA are:

1) You may be able to deduct your contributions inwhole or in part, depending on the type of IRA andyour circumstances, and

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2) Generally, amounts in your IRA, including earningsand gains, are not taxed until distributed, or, insome cases, are not taxed at all if distributed ac-cording to the rules.

Chapter 1 discusses the rules for traditional IRAs(those that are not Roth, SIMPLE, or education IRAs).Chapter 2 discusses the Roth IRA, which featuresnondeductible contributions and tax-free distributions.Chapter 3 discusses the education IRA, which can beset up to finance higher education expenses. Chapter4 discusses simplified employee pensions (SEPs) un-der which IRAs can be set up to receive contributionsfrom employers under SEP plans. Chapter 5 discussesSIMPLE IRAs, which are IRAs set up to receive em-ployer contributions under a savings incentive matchplan for employees (SIMPLE).

This publication explains the rules for setting up anIRA, contributing to it, transferring money or propertyto and from it, making withdrawals from it, and receivingdistributions from it. Penalties for breaking the rules arealso explained. Worksheets, sample forms, and tables,listed under Appendices in the contents, are includedto help you comply with the rules. These appendicesare at the back of this publication.

Comments and suggestions. We welcome yourcomments about this publication and your suggestionsfor future editions.

You can e-mail us while visiting our web site atwww.irs.gov/help/email2.html.

You can write to us at the following address:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone. Therefore,it would be helpful if you would include your daytimephone number, including the area code, in your corre-spondence.

Useful ItemsYou may want to see:

Publications

560 Retirement Plans for Small Business (In-cluding SEP, SIMPLE, and Qualified Plans)

571 Tax-Sheltered Annuity Plans (403(b) Plans)

575 Pension and Annuity Income

939 General Rule for Pensions and Annuities

Forms (and instructions)

W4P Withholding Certificate for Pension or Annu-ity Payments

1099R Distributions From Pensions, Annuities,Retirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc.

5304SIMPLE Savings Incentive Match Plan forEmployees of Small Employers (SIMPLE)(Not Subject to the Designated Financial In-stitution Rules)

5305SEP Simplified Employee Pension-Individual

Retirement Accounts Contribution Agree-ment

5305ASEP Salary Reduction and Other ElectiveSimplified Employee Pension-Individual Re-tirement Accounts Contribution Agreement

5305S SIMPLE Individual Retirement Trust Ac-count

5305SA SIMPLE Individual Retirement CustodialAccount

5305SIMPLE Savings Incentive Match Plan for

Employees of Small Employers (SIMPLE)

5329 Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, Mod-ified Endowment Contracts, and MSAs

5498 IRA Contribution Information

8606 Nondeductible IRAs

8815 Exclusion of Interest From Series EE and IU.S. Savings Bonds Issued After 1989 (ForFilers With Qualified Higher Education Ex-penses)

8839 Qualified Adoption Expenses

See chapter 6 for information about getting thesepublications and forms.

1.

Traditional IRAsThis chapter discusses the original IRA. In this pub-

lication the original IRA (sometimes called an ordinaryor regular IRA) is referred to as a traditional IRA. Twoadvantages of a traditional IRA are:

1) You may be able to deduct some or all of yourcontributions to it, depending on your circum-stances, and

2) Generally, amounts in your IRA, including earningsand gains, are not taxed until they are distributed.

Chapter 1 Traditional IRAs Page 3


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What Is a Traditional IRA?A traditional IRA is any IRA that is not a Roth IRA, aSIMPLE IRA, or an education IRA.

Who Can Set Up a Traditional

IRA?You can set up and make contributions to a traditionalIRA if you (or, if you file a joint return, your spouse)received taxable compensation during the year and youwere not age 701/2 by the end of the year.

You can have a traditional IRA whether or not youare covered by any other retirement plan. However, youmay not be able to deduct all of your contributions if youor your spouse are covered by an employer retirementplan. See How Much Can I Deduct?, later.

Both spouses have compensation. If both you andyour spouse have compensation and are under age

701

/2, each of you can set up an IRA. You cannot bothparticipate in the same IRA.

What Is Compensation?As stated earlier, to set up and contribute to a traditionalIRA, you or your spouse must have received taxablecompensation. This rule applies to both deductible andnondeductible contributions. Generally, what you earnfrom working is compensation.

Compensation includes the items discussed next.

Wages, salaries, etc. Wages, salaries, tips, profes-sional fees, bonuses, and other amounts you receive

for providing personal services are compensation. TheIRS treats as compensation any amount properlyshown in box 1 (Wages, tips, other compensation) ofForm W2, Wage and Tax Statement, provided thatamount is reduced by any amount properly shown inbox 11 (Nonqualified plans). Scholarship and fellowshippayments are compensation for this purpose only ifshown in box 1 of Form W2.

Commissions. An amount you receive that is a per-centage of profits or sales price is compensation.

Self-employment income. If you are self-employed

(a sole proprietor or a partner), compensation is the netearnings from your trade or business (provided yourpersonal services are a material income-producingfactor), reduced by the deduction for contributions madeon your behalf to retirement plans and the deductionallowed for one-half of your self-employment taxes.

Compensation includes earnings from self-employ-ment even if they are not subject to self-employment taxbecause of your religious beliefs. See Publication 533,Self-Employment Tax, for more information.

When you have both self-employment income andsalaries and wages, your compensation includes bothamounts.

Self-employment loss. If you have a net loss fromself-employment, do not subtract the loss from yoursalaries or wages when figuring your total compen-sation.

Alimony and separate maintenance. Treat as com-pensation any taxable alimony and separate mainte-nance payments you receive under a decree of divorceor separate maintenance.

What Is Not Compensation?Compensation does notinclude any of the following

items.

Earnings and profits from property, such as rentalincome, interest income, and dividend income.

Pension or annuity income.

Deferred compensation received (compensationpayments postponed from a past year).

Income from a partnership for which you do notprovide services that are a material income-

producing factor. Any amounts you exclude from income, such as

foreign earned income and housing costs.

When Can a Traditional IRABe Set Up?You can set up a traditional IRA at any time. However,the time for making contributions for any year is limited.See When Can Contributions Be Made?, later.

How Can a Traditional IRA BeSet Up?You can set up different kinds of IRAs with a variety oforganizations. You can set up an IRA at a bank or otherfinancial institution or with a mutual fund or life insur-ance company. You can also set up an IRA throughyour stockbroker. Any IRA must meet Internal RevenueCode requirements. The requirements for the variousarrangements are discussed below.

Kinds of traditional IRAs. Your traditional IRA can bean individual retirement account or annuity. It can bepart of either a simplified employee pension (SEP) ora part of an employer or employee association trustaccount.

Individual Retirement AccountAn individual retirement account is a trust or custodialaccount set up in the United States for the exclusivebenefit of you or your beneficiaries. The account iscreated by a written document. The document mustshow that the account meets all of the following re-quirements.

Page 4 Chapter 1 Traditional IRAs


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1) The trustee or custodian must be a bank, a federallyinsured credit union, a savings and loan associ-ation, or an entity approved by the IRS to act astrustee or custodian.

2) The trustee or custodian generally cannot acceptcontributions of more than $2,000 a year. However,rollover contributions and employer contributions toa simplified employee pension (SEP), as explainedin chapter 4, can be more than $2,000.

3) Contributions, except for rollover contributions,must be in cash. See Rollovers, later.

4) The amount in your account must be fully vested(you must have a nonforfeitable right to the amount)at all times.

5) Money in your account cannot be used to buy a lifeinsurance policy.

6) Assets in your account cannot be combined withother property, except in a common trust fund orcommon investment fund.

7) You must start receiving distributions by April 1 ofthe year following the year in which you reach age

701/2. See When Must I Withdraw IRA Assets?(Required Distributions), later.

Individual Retirement AnnuityYou can set up an individual retirement annuity bypurchasing an annuity contract or an endowment con-tract from a life insurance company.

An individual retirement annuity must be issued inyour name as the owner, and either you or your ben-eficiaries who survive you are the only ones who canreceive the benefits or payments.

An individual retirement annuity must meet all thefollowing requirements.

1) Your entire interest in the contract must benonforfeitable.

2) The contract must provide that you cannot transferany portion of it to any person other than the issuer.

3) There must be flexible premiums so that if yourcompensation changes, your payment can alsochange. This provision applies to contracts issuedafter November 6, 1978.

4) The contract must provide that contributions cannotbe more than $2,000 in any year, and that you mustuse any refunded premiums to pay for future pre-miums or to buy more benefits before the end of thecalendar year after the year you receive the refund.

5) Distributions must begin by April 1 of the year fol-lowing the year in which you reach age 701/2. SeeWhen Must I Withdraw IRA Assets? (RequiredDistributions), later.

Individual Retirement BondsThe sale of individual retirement bonds issued by thefederal government was suspended after April 30,1982. The bonds have the following features.

1) They stop earning interest when you reach age

701/2. If you die, interest will stop 5 years after yourdeath, or on the date you would have reached age701/2, whichever is earlier.

2) You cannot transfer the bonds.

If you cash (redeem) the bonds before the year in whichyou reach age 591/2, you may be subject to a 10% ad-ditional tax. See Early Distributions, later. You can rollover redemption proceeds into IRAs.

Employer and EmployeeAssociation Trust AccountsYour employer, labor union, or other employee associ-ation can set up a trust to provide individual retirementaccounts for its employees or members. The require-ments for individual retirement accounts apply to theseemployer or union-established traditional IRAs.

Simplified Employee Pension (SEP)A simplified employee pension (SEP) is a written ar-rangement that allows your employer to make deduct-

ible contributions to a traditional IRA (a SEP-IRA) setup for you to receive such contributions. See chapter4 for more information.

Required DisclosuresThe trustee or issuer (sometimes called the sponsor)of your traditional IRA generally must give you a dis-closure statement at least 7 days before you set up yourIRA. However, the sponsor does not have to give youthe statement until the date you set up (or purchase, ifearlier) your IRA, provided you are given at least 7 daysfrom that date to revoke the IRA.

If you revoke your IRA within the revocation period,

the sponsor must return to you the entire amount youpaid. The sponsor must report on the appropriate IRSforms both your contribution to the IRA (unless by atrustee-to-trustee transfer) and the distribution to youupon your revocation of the IRA. These requirementsapply to all sponsors.

Generally, the sponsor is the bank that is the trusteeof the account or the insurance company that issued theannuity contract.

Disclosure statement. The disclosure statementgiven to you by the plan sponsor must explain certainitems in plain language. For example, the statementshould explain when and how you can revoke the IRA,

and include the name, address, and telephone numberof the person to receive the notice of cancellation. Thisexplanation must appear at the beginning of the dis-closure statement.

What If I Inherit an IRA?If you inherit a traditional IRA, it is subject to specialrules.

Note. A traditional IRA is included in the estate ofthe decedent who owned it.



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Inherited from spouse. If you inherit a traditional IRAfrom your deceased spouse, you can generally roll itover into another traditional IRA established for you oryou can choose to treat the inherited IRA as your own.

You will be considered to have chosen to treat it asyour own if:

Contributions (including rollover contributions) aremade to the inherited IRA, or

Required distributions are not made from it.

Inherited from someone other than spouse. If youinherit a traditional IRA from anyone other than yourdeceased spouse, you cannot treat the inherited IRAas your own. This means that contributions (includingrollover contributions) cannot be made to the IRA andyou cannot roll over any amounts out of the inheritedIRA. But, like the original owner, you generally will notowe tax on the assets in the IRA until you receive dis-tributions from it. You must begin receiving distributionsfrom the IRA under the rules for distributions that applyto beneficiaries.

More information. For more information aboutrollovers, required distributions, and inherited IRAs,see:

Rollovers, later in this chapter under Can I MoveRetirement Plan Assets?,

When Must I Withdraw IRA Assets? (Required Dis-tributions), later in this chapter under When Can IWithdraw or Use IRA Assets?, and

The discussion of beneficiaries later in this chapterunder When Must I Withdraw IRA Assets? (Re-quired Distributions), and the discussion of inherited

IRAs under Are Distributions Taxable?.

How Much Can BeContributed?As soon as you set up your traditional IRA, contributionscan be made to it through your chosen sponsor (trusteeor other administrator). Contributions must be in theform of money (cash, check, or money order). Propertycannot be contributed. However, you may be able totransfer or roll over certain property from one retirement

plan to another. See the discussions of rollovers andother transfers later in this chapter under Can I MoveRetirement Plan Assets?.

Contributions can be made to your traditional IRA foreach year that you receive compensation and have notreached age 701/2. For any year in which you do notwork, contributions cannot be made to your IRA unlessyou receive alimony or file a joint return with a spousewho has compensation. See Who Can Set Up a Tra-ditional IRA?, earlier. Even if contributions cannot bemade for the current year, the amounts contributed foryears in which you did qualify can remain in your IRA.Contributions can resume for any years that you qualify.

Limits and Other RulesThere are limits and other rules that affect the amountthat can be contributed. These limits and rules are ex-plained below.

General limit. The most that can be contributed forany year to your traditional IRA is the smaller of thefollowing amounts:

Your compensation (defined earlier) that you mustinclude in income for the year, or

$2,000.

Note. This limit is reduced by any contributions toa section 501(c)(18) plan (generally, a pension plancreated before June 25, 1959, that is funded entirelyby employee contributions).

This is the most that can be contributed regardlessof whether the contributions are to one or more tradi-tional IRAs or whether all or part of the contributionsare nondeductible. (See Nondeductible Contributions,later.)

CAUTION

!Contributions on your behalf to a traditional IRAreduce your limit for contributions to a Roth IRA(see chapter 2).

Examples. George, who is single, earns $24,000 in2000. His IRA contributions for 2000 are limited to$2,000.

Danny, a college student working part time, earns$1,500 in 2000. His IRA contributions for 2000 are lim-ited to $1,500, the amount of his compensation.

Spousal IRA limit. If you file a joint return and yourtaxable compensation is less than that of your spouse,the most that can be contributed for the year to your IRAis the smaller of the following two amounts:

1) $2,000, or

2) The total compensation includable in the gross in-come of both you and your spouse for the year,reduced by the following two amounts.

a) Your spouse's IRA contribution for the year.

b) Any contributions for the year to a Roth IRA onbehalf of your spouse.

This means that the total combined contributions thatcan be made for the year to your IRA and your spouse's

IRA can be as much as $4,000.Note. This traditional IRA limit is reduced by any

contributions to a section 501(c)(18) plan (generally, apension plan created before June 25, 1959, that isfunded entirely by employee contributions).

CAUTION

!Contributions to traditional IRAs reduce the limitfor contributions to Roth IRAs (see chapter 2).

Example. Christine, a full-time student with no tax-able compensation, marries Jeremy during the year.For the year, Jeremy has taxable compensation of$30,000. He plans to contribute (and deduct) $2,000 to



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a traditional IRA. If he and Christine file a joint return,each can contribute $2,000 for the year to a traditionalIRA. This is because Christine, who has no compen-sation, can add Jeremy's compensation, reduced by theamount of his IRA contribution, ($30,000 $2,000 =$28,000) to her own compensation (0) to figure hermaximum contribution to a traditional IRA. In her case,$2,000 is her contribution limit, because $2,000 is lessthan $28,000 (her compensation for purposes of figur-ing her contribution limit).

Community property laws. Except as just discussedunder Spousal IRA limit, each spouse figures his or herlimit separately, using his or her own compensation.This is the rule even in states with community propertylaws.

Age 701/2 rule. Contributions cannot be made to yourtraditional IRA for the year you reach age 701/2 or anylater year.

Filing status. Generally, except as discussed earlier

under Spousal IRA limit, your filing status has no effecton the amount of allowable contributions to your tradi-tional IRA. However, if during the year either you oryour spouse was covered by a retirement plan at work,your deduction may be reduced or eliminated, de-pending on your filing status and income. See HowMuch Can I Deduct?, later.

Example. Tom and Rosa are married and both areunder age 701/2. They both work and each has a tradi-tional IRA. Tom earned $1,800 and Rosa earned$48,000 in 2000. Even though Tom earned less than$2,000, they can contribute up to $2,000 to his IRA forthe year, under the spousal IRA limit rule, if they file a

joint return. They can contribute up to $2,000 to Rosa'sIRA. If they file separate returns, the amount that canbe contributed to Tom's IRA is limited to $1,800.

Contributions not required. You do not have to con-tribute to your traditional IRA for every tax year, evenif you can.

Less than maximum contributions. If contributionsto your traditional IRA for a year were less than the limit,you cannot contribute more in a later year to make upthe difference.

Example. Justin earns $30,000 in 2000. Althoughhe can contribute up to $2,000 for 2000, he contributesonly $1,000. Justin cannot make up the $1,000 ($2,000 $1,000) difference between his actual contributionsfor 2000 and his 2000 limit by contributing $1,000 morethan the limit in 2001 or any later year.

More than maximum contributions. If contributionsto your IRA for a year were more than the limit, you canapply the excess contribution in one year to a later yearif the contributions for that later year are less than themaximum allowed for that year. See Excess Contribu-tions, later.

More than one IRA. If you have more than one IRA,the limit applies to the total contributions made on yourbehalf to all your traditional IRAs for the year.

CAUTION

!The limit for contributions to Roth IRAs (seechapter 2) is reduced by contributions made onyour behalf to your traditional IRAs.

Annuity or endowment contracts. If you invest in an

annuity or endowment contract under an individual re-tirement annuity, no more than $2,000 can be contrib-uted toward its cost for the tax year, including the costof life insurance coverage. If more than $2,000 is con-tributed, the annuity or endowment contract is disqual-ified.

Brokers' commissions. Brokers' commissions paid inconnection with your traditional IRA are part of yourcontribution.

Trustees' fees. Trustees' administrative fees are notsubject tothe contribution limit.

When Can Contributions BeMade?Contributions can be made to your traditional IRA fora year at any time during the year or by the due datefor filing your return for that year, not including exten-sions. For most people, this means that contributionsfor 2000 must be made by April 16, 2001.

Designating year for which contribution is made.If an amount is contributed to your traditional IRA be-tween January 1 and April 16, you should tell the

sponsor which year (the current year or the previousyear) the contribution is for. If you do not tell the spon-sor which year it is for, the sponsor can assume, forreporting to the IRS, that the contribution is for thecurrent year (the year the sponsor received it).

Filing before a contribution is made. You can fileyour return claiming a traditional IRA contribution beforethe contribution is actually made. However, the contri-bution must be made by the due date of your return,notincluding extensions.

How Much Can I Deduct?Generally, you can deduct the lesser of:1) The contributions to your traditional IRA for the

year, or

2) The general limit (or the spousal IRA limit, if appli-cable) explained earlier under How Much Can BeContributed?

However, if you or your spouse were covered by anemployer retirement plan, you may not be able to de-duct this amount. See Limit if Covered by EmployerPlan, later.



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Trustees' fees. Trustees' administrative fees that arebilled separately and paid in connection with your tra-ditional IRA are not deductible as IRA contributions.However, they are deductible (if they are ordinary andnecessary) as a miscellaneous itemized deduction onSchedule A (Form 1040). The deduction is subject tothe 2%-of-adjusted-gross-income limit.

Brokers' commissions. These commissions are partof your IRA contribution and are not deductible as a

miscellaneous itemized deduction on Schedule A (Form1040).

Full deduction. If neither you nor your spouse werecovered for any part of the year by an employer retire-ment plan, you can take a deduction for total contribu-tions to one or more of your traditional IRAs of up to thelesser of:

1) $2,000, or

2) 100% of your compensation.

This limit is reduced by any contributions made to a

501(c)(18) plan on your behalf.Spousal IRA. In the case of a married couple withunequal compensation who file a joint return, the de-duction for contributions to the traditional IRA of thespouse with less compensation is limited to the lesserof:

1) $2,000, or

2) The total compensation includible in the gross in-come of both spouses for the year reduced by thefollowing two amounts.

a) The IRA deduction for the year of the spousewith the greater compensation.

b) Any contributions for the year to a Roth IRA onbehalf of the spouse with the greater compen-sation.

This limit is reduced by any contributions to a section501(c)(18) plan on behalf of the spouse with less com-pensation.

Note. If you were divorced or legally separated (anddid not remarry) before the end of the year, you cannotdeduct any contributions to your spouse's IRA. After adivorce or legal separation, you can deduct only thecontributions to your own IRA and your deductions aresubject to the rules for single individuals.

Covered by an employer retirement plan. If you oryour spouse were covered by an employer retirementplan at any time during the year for which contributionswere made, your deduction may be further limited. Thisis discussed later under Limit if Covered by EmployerPlan. Limits on the amount you can deduct do not affectthe amount that can be contributed.

Form 5498. You should receive by June 1, 2001, Form5498 (or a similar statement) from the sponsor of yourIRA, showing all the contributions made to your IRA for2000.

Are You Covered by an EmployerPlan?The Form W2 you receive from your employer has abox used to indicate whether you were covered for theyear. The Pension Plan box should be checked if youwere covered.

Reservists and volunteer firefighters should also seeSituations in Which You Are Not Covered, later.

If you are not certain whether you were covered by

your employer's retirement plan, you should ask youremployer.

Judges. For purposes of the IRA deduction, federaljudges are covered by an employer plan.

For Which Year(s) Are You Covered?Special rules apply to determine the tax years for whichyou are covered by an employer plan. These rules differdepending on whether the plan is a defined contributionplan or a defined benefit plan.

Tax year. Your tax year is the annual accounting pe-

riod you use to keep records and report income andexpenses on your income tax return. For most people,the tax year is the calendar year.

Defined contribution plan. A defined contribution planis a plan that provides for a separate account for eachperson covered by the plan. In a defined contributionplan, the amount to be contributed to each participant'saccount is spelled out in the plan. The level of benefitsactually provided to a participant depends on the totalamount contributed to that participant's account andany earnings on those contributions. Types of definedcontribution plans include profit-sharing plans, stockbonus plans, and money purchase pension plans.

Generally, you are covered by a defined contributionplan for a tax year if amounts are contributed or allo-cated to your account for the plan year that ends withor within that tax year. See Situations in Which You AreNot Covered, later.

Example. Company A has a money purchase pen-sion plan. Its plan year is from July 1 to June 30. Theplan provides that contributions must be allocated asof June 30. Bob, an employee, leaves Company A onDecember 30, 1999. The contribution for the plan yearending on June 30, 2000, is made February 15, 2001.Because an amount is contributed to Bob's account forthe plan year, Bob is covered by the plan for his 2000

tax year.

No vested interest. If an amount is allocated to youraccount for a plan year, you are covered by that planeven if you have no vested interest in (legal right to) theaccount.

Defined benefit plan. A defined benefit plan is any planthat is not a defined contribution plan. In a definedbenefit plan, the level of benefits to be provided to eachparticipant is spelled out in the plan. The plan admin-istrator figures the amount needed to provide thosebenefits and those amounts are contributed to the plan.



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Table 1.1 Can I Take a Traditional IRA Deduction? This chart sums up whether you can take afull deduction, a partial deduction, or no deduction, as discussed in this chapter.

If yourModified AGI*

is:

If You Are Covered by aRetirement Plan at Work and Your

Filing Status is:

At Least

Single

Head ofHousehold

MarriedFiling Jointly(even if yourspouse is notcovered by aplan at work)

Qualifying

Widow(er)

*Modified AGI (adjusted gross income). For Form 1040A, it is the amounton line 15 increased by any excluded qualified bond interest shown onForm 8815, Exclusion of Interest from Series EE and I U.S. Savings BondsIssued after 1989, and certain tax-exempt income amounts. (See Modifiedadjusted gross income, later.) For Form 1040, it is the amount on line 33,figured without taking into account any IRA deduction or any foreign earnedincome exclusion and foreign housing exclusion (deduction), any student

**If you did not live with your spouse at any time during the year,your filing status is considered, for this purpose, as Single (thereforeyour IRA deduction is determined under the Single column).

Married FilingSeparately**

But LessThan You Can Take

$0.01 $10,000.00 Full deduction Full deduction Partial deduction

$10,000.00 $32,000.00 Full deduct ion Full deduct ion No deduc tion

$32,000.00 $42,000.00 Partial deduction Full deduction No deduction

$42,000.00 $52,000.00 No deduction Full deduction No deduction

$52,000.00 $62,000.00 No deduction No deduction

$62,000.00 No deduction No deduction No deduction

Married FilingJointly (andyour spouse iscovered by aplan at work)

MarriedFilingSeparately(and yourspouse iscovered bya plan at

work)***

FullDeduction

MarriedFiling Jointlyor Separately(and spouse isnot coveredby a plan atwork)

If You Are Not Covered by aRetirement Plan at Work and Your

Filing Status is:

Single

Head ofHousehold

QualifyingWidow(er)

You Can Take

Partial deduction

You Can Take

Full deduction

Full deduction

Full deduction

Full deduction

You Can Take You Can Take You Can Take You Can Take

FullDeduction

***You are entitled to the full deduction if you did not live with yourspouse at any time during the year.

$150,000.00

Full deduction

Full deduction

$160,000.00

$160,000.00 or over

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

Partial deduction

No deduction

$150,000.00

Partial deduction

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

loan interest deduction, any qualified bond interest exclusion fromForm 8815, and certain tax-exempt income amounts. (See Modifiedadjusted gross income, later.)

Defined benefit plans include pension plans and annuityplans.

If you are eligible to participate in your employer'sdefined benefit plan for the plan year that ends within

your tax year, you are covered by the plan. This ruleapplies even if you:

Declined to participate in the plan,

Did not make a required contribution, or

Did not perform the minimum service required toaccrue a benefit for the year.

Example. Nick, an employee of Company B, is eli-gible to participate in Company B's defined benefit plan,which has a July 1 to June 30 plan year. Nick leavesCompany B on December 30, 1999. Since Nick is eli-

gible to participate in the plan for its year ending June30, 2000, he is covered by the plan for his 2000 taxyear.

No vested interest. If you accrue a benefit for a planyear, you are covered by that plan even if you have novested interest in (legal right to) the accrual.

Situations in Which You Are Not CoveredUnless you are covered by another employer plan, youare not covered by an employer plan if you are in oneof the situations described below.

Social security or railroad retirement. Coverage un-der social security or railroad retirement is not coverageunder an employer retirement plan.

Benefits from previous employer's plan. If you re-ceive retirement benefits from a previous employer'splan, you are not covered by that plan.

Reservists. If the only reason you participate in a planis because you are a member of a reserve unit of thearmed forces, you may not be covered by the plan. Youare not covered by the plan if both of the followingconditions are met.

1) The plan you participate in is established for itsemployees by:

a) The United States,b) A state or political subdivision of a state, or

c) An instrumentality of either (a) or (b) above.

2) You did not serve more than 90 days on active dutyduring the year (not counting duty for training).

Volunteer firefighters. If the only reason you partic-ipate in a plan is because you are a volunteer firefighter,you may not be covered by the plan. You are not cov-ered by the plan if bothof the following conditions aremet.



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1) The plan you participate in is established for itsemployees by:

a) The United States,

b) A state or political subdivision of a state, or

c) An instrumentality of either (a) or (b) above.

2) Your accrued retirement benefits at the beginningof the year will not provide more than $1,800 peryear at retirement.

Limit If Covered By Employer PlanAs discussed earlier, the deduction you can take forcontributions made to your traditional IRA depends onwhether you or your spouse were covered for any partof the year by an employer retirement plan. Your de-duction is also affected by how much income you hadand by your filing status. Your deduction may also beaffected by social security benefits you received.

Reduced or no deduction. If either you or your spousewere covered by an employer retirement plan, you may

be entitled to only a partial (reduced) deduction or nodeduction at all, depending on your income and yourfiling status.

Your deduction begins to decrease (phase out) whenyour income rises above a certain amount and is elim-inated altogether when it reaches a higher amount.These amounts vary depending on your filing status.

To determine if your deduction is subject to thephaseout, you must determine your modified adjustedgross income (AGI) and your filing status, as explainedunder Deduction Phaseout. Once you have determinedyour modified AGI and your filing status, you can useTable 1.1 to determine if the phaseout applies.

Social Security RecipientsInstead of using Table 1.1 and the Worksheet For Re-duced IRA Deduction, later, complete the worksheetsin Appendix Bof this publication if, for the year, allofthe following apply.

You received social security benefits.

You received taxable compensation.

Contributions were made to your traditional IRA.

You or your spouse was covered by an employerretirement plan.

Use the worksheets in Appendix B to figure your IRA

deduction, your nondeductible contribution, and thetaxable portion, if any, of your social security benefits.Appendix B includes an example with filled-in work-sheets to assist you.

Deduction PhaseoutThe amount of any reduction in the limit on your IRAdeduction (phaseout) depends on whether you or yourspouse were covered by an employer retirement plan.

If you were covered. If you were covered by an em-ployer retirement plan and you did not receive any so-cial security retirement benefits, your IRA deduction

may be reduced or eliminated entirely depending onyour filing status and modified AGI, as shown in TableA, below.

*See Lived apart from spouseunder Filing status, later.

TIPFor 2001, if you are covered by a retirementplan at work, your IRA deduction will not be re-duced (phased out) unless your modified AGI

is between:

$33,000 (a $1,000 increase) and $43,000 for a sin-gle individual (or head of household),

$53,000 (a $1,000 increase) and $63,000 for amarried couple filing a joint return (or a qualifyingwidow(er)), or

$0 (no increase) and $10,000 for a married indi-vidual filing a separate return.

If your spouse is covered. If you are not covered byan employer retirement plan, but your spouse is, andyou did not receive any social security benefits, yourIRA deduction may be reduced or eliminated entirely

depending on your filing status and modified AGI asshown in Table Bnext.

*See Lived apart from spousebelow.

Filing status. Your filing status depends primarily onyour marital status. For this purpose you need to knowif your filing status is single or head of household,married filing jointly or qualifying widow(er), or marriedfiling separately. If you need more information on filingstatus, see Publication 501, Exemptions, Standard De-duction, and Filing Information.

Lived apart from spouse. If you did not live withyour spouse at any time during the year and you file aseparate return, your filing status, for this purpose, issingle.

Table A

If your filing status

is:

Your IRA deductionis reduced if yourmodified AGI

is between:

Yourdeductionis eliminatedif yourmodified AGI

is:Single, orHead of household $32,000 and $42,000 $42,000 or more

Marriedjoint return,or Qualifyingwidow(er) $52,000 and $62,000 $62,000 or more

Marriedseparatereturn* $ 0 and $10,000 $10,000 or more

Table B

If your filing statusis:

Your IRA deductionis reduced if yourmodified AGIis between:

Yourdeductionis eliminatedif yourmodified AGIis:

Marriedjoint return $150,000 and $160,000 $160,000 or more

Marriedseparatereturn* $ 0 and $ 10,000 $ 10,000 or more



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Modified adjusted gross income (AGI). How you fig-ure your modified AGI depends on whether you arefiling Form 1040 or Form 1040A. If you made contribu-tions to your IRA for 2000 and received a distributionfrom your IRA in 2000, see Both contributions for 2000and distributions in 2000, later.

CAUTION

!Do not assume that your modified AGI is thesame as your compensation. Your modified AGImay include income in addition to your com-

pensation such as interest, dividends, and income fromIRA distributions.

Form 1040. If you file Form 1040, refigure theamount on the page 1 adjusted gross income linewithout taking into account any of the followingamounts.

IRA deduction.

Student loan interest deduction.

Foreign earned income exclusion.

Foreign housing exclusion or deduction.

Exclusion of qualified bond interest shown on Form8815.

Exclusion of employer-paid adoption expensesshown on Form 8839.

This is your modified AGI.Form 1040A. If you file Form 1040A, refigure the

amount on the page 1 adjusted gross income linewithout taking into account any of the followingamounts.

IRA deduction.

Student loan interest deduction.

Exclusion of qualified bond interest shown on Form8815.

Exclusion of employer-paid adoption expensesshown on Form 8839.

This is your modified AGI.Income from IRA distributions. If you received

distributions in 2000 from one or more traditional IRAsand your traditional IRAs include only deductible con-tributions, the distributions are fully taxable.

Both contributions for 2000 and distributions in2000. If all three of the following occurred, any IRAdistributions you received in 2000 may be partly tax freeand partly taxable.

1) You received distributions in 2000 from one or moretraditional IRAs AND

2) You made contributions to a traditional IRA for 2000AND

3) Some of those contributions may be nondeductiblecontributions depending on whether your IRA de-duction for 2000 is reduced.

If all three of the above occurred, you must figure thetaxable part of the traditional IRA distribution before youcan figure your modified AGI. To do this, you can usethe Worksheet To Figure Taxable Part of Distribution.

If at least one of the above did not occur, figure yourmodified AGI as explained earlier under either Form1040or Form 1040A.

Using the worksheet. Form 8606 and the related in-structions may be helpful when using this worksheet.

When used in the following worksheet the term out-standing rolloverrefers to an amount distributed froma traditional IRA as part of a rollover that, as of De-cember 31, 2000, had not yet been reinvested into an-

other traditional IRA.

Note. If the amount on line 5 of this worksheet in-cludes an amount converted to a Roth IRA by 12/31/00,you must determine the percentage of the distributionallocable to the conversion. To figure the percentage,

divide the amount converted (from line 14c of Form8606) by the total distributions shown on line 5. To fig-ure the amounts to include on line 10 of this worksheetand on line 16, Part II of Form 8606, multiply line 9 ofthe worksheet by the percentage you figured.

How To Figure Your Reduced IRADeductionIf you or your spouse is covered by an employer re-tirement plan and you did not receive any social securitybenefits, you can figure your reduced IRA deductionby using the Worksheet for Reduced IRA Deduction,that follows. The instructions for both Form 1040 and

Worksheet To FigureTaxable Part of Distribution

Use only if you made contributions to a traditional IRA for 2000 andhave to figure the taxable part of your 2000 distributions to determineyour modified AGI. See How Much Can I Deduct?, earlier.

1) Enter the basis in your traditional IRA(s) as of 12/31/99...................................................................................... $

2) Enter the total of all contributions made to your tradi-tional IRAs during 2000 and all contributions madeduring 2001 that were for 2000, whether or notdeductible. Do not include rollover contributionsproperly rolled over into IRAs ...................................... $

3) Add lines 1 and 2 ........................................................ $4) Enter the value of ALL your traditional IRA(s) as of

12/31/00 (include any outstanding rollovers fromtraditional IRAs to other traditional IRAs) .................... $5) Enter the total distributions from traditional IRAs (in-

cluding amounts converted to Roth IRAs that will beshown on line 14c of Form 8606) received in 2000. (Donot include outstanding rollovers included on line 4 orany rollovers between traditional IRAs completed by12/31/00. Also, do not include certain returned contri-butions described in the instructions for line 7, Part I,of Form 8606.) ............................................................. $

6) Add lines 4 and 5 ........................................................ $7) Divide line 3 by line 6. Enter the result as a decimal

(to at least two places). Do not enter more than 1.00 .8) Nontaxable portion of the distribution. Multiply line

5 by line 7. Enter the result here and on line 10 ofForm 8606 ................................................................... $

9) Taxable portion of the distribution (before adjust-ment for conversions). Subtract line 8 from line 5.Enter the result here and if there are no amountsconverted to Roth IRAs, STOP HERE and enter theresult on line 13 of Form 8606 .................................... $

10) Enter the amount included on line 9 that is allocableto amounts converted to Roth IRAs by 12/31/00. (SeeNote at the end of this worksheet.) Enter hereand on line 16 of Form 8606. ...................................... $

11) Taxable portion of the distribution (after adjust-ment for conversions). Subtract line 10 from line 9.Enter the result here and on line 13 of Form 8606 .... $



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Form 1040A include similar worksheets that you canuse instead of the worksheet in this publication.

If you or your spouse is covered by an employerretirement plan, and you did receive any social securitybenefits, see Social Security Recipients, earlier.

Note. If you were married and both you and yourspouse contributed to IRAs, figure your deduction andyour spouse's deduction separately.

Note. If line 2 is equal to or more than theamount on line 1, STOP HERE. Your IRAcontributions are not deductible. See Non-deductible Contributions.

Reporting Deductible ContributionsIf you file Form 1040, enter your IRA deductions on line23 of that form. If you file Form 1040A, enter your IRAdeductions on line 16 of that form. You cannot deductIRA contributions on Form 1040EZ.

Self-employed. If you are self-employed (a sole pro-prietor or partner) and have a SEP-IRA or a SIMPLEIRA, enter your deduction for allowable plan contribu-

tions on line 29, Form 1040.

Nondeductible ContributionsAlthough your deduction for IRA contributions may bereduced or eliminated, contributions can be made toyour IRA of up to the general limit ($2,000 or 100% ofcompensation, whichever is less) or the spousal IRAlimit (whichever applies). The difference between yourtotal permitted contributions and your IRA deduction, ifany, is your nondeductible contribution.

Example. Sonny Martin is single. In 2000, he iscovered by a retirement plan at work. His salary is

$52,312. His modified adjusted gross income (modifiedAGI) is $55,000. Sonny makes a $2,000 IRA contribu-tion for that year. Because he is covered by a retirementplan and his modified AGI is above $42,000, he cannotdeduct his $2,000 IRA contribution. However, he des-ignates this contribution as a nondeductible contributionby reporting it on his tax return as explained later underReporting Nondeductible Contributions.

Designating contributions as nondeductible. Todesignate contributions as nondeductible, you must fileForm 8606. (See the filled-in Forms 8606 in AppendixD.)

You do not have to designate a contribution as

nondeductible until you file your tax return. When youfile, you can even designate otherwise deductible con-tributions as nondeductible contributions.

Tax on earnings on nondeductible contributions.As long as contributions are within the contributionlimits, none of the earnings or gains on those contribu-tions (deductible or nondeductible) will be taxed untilthey are distributed.

Cost basis. You will have a cost basis in your IRA ifthere are nondeductible contributions. Your cost basisis the sum of the nondeductible contributions to your

IRA minus any withdrawals or distributions of non-deductible contributions.

CAUTION

!Generally, distributions from any of your tradi-tional IRAs will include both taxable and non-taxable (cost basis) amounts. SeeAre Distri-

butions Taxable?, later, for more information.

RECORDS

Recordkeeping. There is a recordkeepingworksheet, Appendix A, Summary Record ofTraditional IRA(s) for 2000, that you can use to

keep records of deductible and nondeductible IRAcontributions.

Worksheet for Reduced IRA Deduction(Use only if you or your spouse is covered by an employer plan andyour modified AGI is within the phaseout range that applies.)

If you are coveredandyour filing status is:

And yourmodified AGIis over:

Enteronline 1below:

Single orHead of household $ 32,000 $ 42,000

Marriedjoint return orQualifying widow(er) $ 52,000 $ 62,000

Marriedseparate return* $ 0 $ 10,000

If your spouse is covered, but youare not, and your filing status is:


Enteronline 1below:

Marriedjoint return $150,000 $160,000

Marriedseparate return* $0 $ 10,000

*See Filing Status, earlier.

1. Enter the amount from above that applies ..................2. Enter your modified AGI(that of both spouses, if

married filing jointly) .....................................................

3. Subtract line 2 from 1. If line 3 is $10,000 or more,STOP HERE. You can take a full IRA deduction forcontributions of up to $2,000 or 100% of your com-pensation, whichever is less. .......................................

4. Multiply line 3 by 20% (.20). If the result is not a mul-tiple of $10, round it to the next highest multiple of $10.(For example, $611.40 is rounded to $620.) However,if the result is less than $200, enter $200 ...................

5. Enter your compensation. If you are filing a joint returnand your compensation is less than your spouse's,include your spouse's compensation reduced by hisor her traditional IRA and Roth IRA contributions forthis year. If you file Form 1040, do not reduce yourcompensation by any losses from self-employment.

6. Enter contributions made, or to be made, to your tra-ditional IRA for 2000, but do not enter more than

$2,000. If contributions are more than $2,000, seeExcess Contributions, later. .........................................7. IRA deduction. Compare lines 4, 5, and 6. Enter the

smallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. If line 6 is more than line 7 and youwant to make a nondeductible contribution, go to line8. ..................................................................................

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here andon line 1 of your Form 8606. .......................................



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You must file Form 8606 to report nondeductiblecontributions even if you do not have to file a tax returnfor the year.

Failure to report nondeductible contributions. If youdo not report nondeductible contributions, all of thecontributions to your traditional IRA will be treated asdeductible. All distributions from your IRA will be taxedunless you can show, with satisfactory evidence, that

nondeductible contributions were made.

Penalty for overstatement. If you overstate theamount of nondeductible contributions on your Form8606 for any tax year, you must pay a penalty of $100for each overstatement, unless it was due to reasonablecause.

Penalty for failure to file Form 8606. You will haveto pay a $50 penalty if you do not file a required Form8606, unless you can prove that the failure was due toreasonable cause.

Examples Worksheet forReduced IRA DeductionThe following examples illustrate the use of the IRAdeduction worksheet shown earlier under How To Fig-ure Your Reduced IRA Deduction.

Example 1. For 2000, Tom and Betty Smith file ajoint return on Form 1040. They both work and Tom iscovered by his employer's retirement plan. Tom's salaryis $40,000 and Betty's is $16,555. They each have atraditional IRA and their combined modified AGI, whichincludes $2,000 interest and dividend income, is$58,555. Since their modified AGI is between $52,000and $62,000 and Tom is covered by an employer plan,Tom is subject to the deduction phaseout discussedearlier under Limit If Covered By Employer Plan.

For 2000, Tom contributed $2,000 to his IRA andBetty contributed $2,000 to hers. Even though they filea joint return, they must use separate worksheets tofigure the IRA deduction for each of them.

Tom can take a deduction of only $690. He musttreat $1,310 ($2,000 minus $690) of his contributionsas nondeductible.

He can choose to treat the $690 as either deductibleor nondeductible contributions. He can either leave the$1,310 of nondeductible contributions in his IRA orwithdraw them by April 16, 2001. He decides to treatthe $690 as deductible contributions and leave the$1,310 of nondeductible contributions in his IRA.

Using the Worksheet for Reduced IRA Deduction,Tom figures his deductible and nondeductible amountsas follows:

Note. If line 2 is equal to or more than the

amount on line 1, STOP HERE. Your IRAcontributions are not deductible. See Non-deductible Contributions.

Betty figures her IRA deduction as follows. Betty cantreat all or part of her contributions as either deductibleor nondeductible. This is because her $2,000 contribu-tion for 2000 is not subject to the deduction phaseoutdiscussed earlier under Limit If Covered By EmployerPlan. She does not need to use the Worksheet for Re-duced IRA Deduction since their modified AGI is notwithin the phaseout range that applies. Betty decidesto treat her $2,000 IRA contributions as deductible.

The IRA deductions of $690 and $2,000 on the jointreturn for Tom and Betty total $2,690.

Example 2. Assume the same facts as in Example1, except that Tom contributed $2,000 to his Roth IRAand $2,000 to a traditional IRA for Betty (a spousal IRA)because Betty had no compensation for the year and




Enteronline 1below:






Enteronline 1below:




1. Enter the amount from above that applies .................. $ 62,0002. Enter your modified AGI(that of both spouses, if

married filing jointly) ..................................................... 58,555

3. Subtract line 2 from line 1. If line 3 is $10,000 ormore, STOP HERE. You can take a full IRA deductionfor contributions of up to $2,000 or 100% of yourcompensation, whichever is less. ................................ 3,445

4. Multiply line 3 by 20% (.20). If the result is not a mul-tiple of $10, round it to the next highest multiple of $10.(For example, $611.40 is rounded to $620.) However,if the result is less than $200, enter $200 ................... 690

5. Enter your compensation. If you are filing a joint returnand your compensation is less than your spouse's,include your spouse's compensation reduced by hisor her traditional IRA and Roth IRA contributions forthis year. If you file Form 1040, do not reduce your

compensation by any losses from self-employment. 40,0006. Enter contributions made, or to be made, to your IRAfor 2000, but do not enter more than $2,000. If con-tributions are more than $2,000, see Excess Contri-butions, later. ............................................................... 2,000

7. IRA deduction. Compare lines 4, 5, and 6. Enter thesmallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. If line 6 is more than line 7 and youwant to make a nondeductible contribution, go to line8. .................................................................................. 690

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here andon line 1 of your Form 8606. ....................................... 1,310



14/85

did not contribute to an IRA. Also, their modified AGI,because of capital gains from sales of stock, increasedto $156,555. Betty figures her IRA deduction as follows:

Note. If line 2 is equal to or more than theamount on line 1, STOP HERE. Your IRAcontributions are not deductible. See Non-deductible Contributions.

Can I Move Retirement PlanAssets?Traditional IRA rules permit you to transfer, tax free,assets (money or property) from other retirement pro-grams (including traditional IRAs) to a traditional IRA.The rules permit the following kinds of transfers.

Transfers from one trustee to another.

Rollovers.

Transfers incident to a divorce.

This chapter discusses all three kinds of transfers.

Transfers to Roth IRAs. Under certain conditions, youcan move assets from a traditional IRA to a Roth IRA.See the discussion at Can I Move Amounts Into a RothIRA?in chapter 2.

Trustee-to-Trustee TransferA transfer of funds in your traditional IRA from onetrustee directly to another, either at your request or atthe trustee's request, is not a rollover. Because thereis no distribution to you, the transfer is tax free. Be-cause it is not a rollover, it is not affected by the 1-yearwaiting period required between rollovers, discussedlater under Rollover From One IRA Into Another.

For information about direct transfers from retirementprograms other than traditional IRAs, see Direct rolloveroption, later in this chapter.

RolloversGenerally, a rollover is a tax-free distribution to you ofcash or other assets from one retirement plan that youcontribute to another retirement plan. The contributionto the second retirement plan is called a rollover con-tribution.

Note. The amount you roll over tax free is generallytaxable later when the new plan distributes that amountto you or your beneficiary.

Kinds of rollovers to an IRA. There are two kinds ofrollover contributions to a traditional IRA. In one, youput amounts you receive from one traditional IRA intothe same or another traditional IRA. In the other, youput amounts you receive from an employer's qualifiedretirement plan for its employees into a traditional IRA.

Treatment of rollovers. You cannot deduct a rollovercontribution, but you must report the rollover distributionon your tax return as discussed later under Reportingrollovers from IRAs and Reporting rollovers from em-ployer plans.

Rollover notice. A written explanation of rollovertreatment must be given to you by the plan making thedistribution.

Time Limit for Making

a Rollover ContributionYou must make the rollover contribution by the 60th dayafter the day you receive the distribution from your tra-ditional IRA or your employer's plan. However, seeExtension of rollover period, later.

Rollovers completed after the 60-day period.Amounts not rolled over within the 60-day period do notqualify for tax-free rollover treatment and you must treatthem as a taxable distribution from either your IRA oryour employer's plan. The amount not rolled over istaxable in the year distributed, not in the year the60-day period expires. You may also have to pay a 10%




Enteronline 1below:






Enteronline 1below:




1. Enter the amount from above that applies .................. $160,0002. Enter your modified AGI(that of both spouses, if

married filing jointly) ..................................................... 156,555

3. Subtract line 2 from line 1. If line 3 is $10,000 ormore, STOP HERE. You can take a full IRA deductionfor contributions of up to $2,000 or 100% of yourcompensation, whichever is less. ................................ 3,445

4. Multiply line 3 by 20% (.20). If the result is not a mul-tiple of $10, round it to the next highest multiple of $10.(For example, $611.40 is rounded to $620.) However,if the result is less than $200, enter $200 ................... 690

5. Enter your compensation. If you are filing a joint return

and your compensation is less than your spouse's,include your spouse's compensation reduced by hisor her traditional IRA and Roth IRA contributions forthis year. If you file Form 1040, do not reduce yourcompensation by any losses from self-employment. 38,000

6. Enter contributions made, or to be made, to your IRAfor 2000, but do not enter more than $2,000. (If con-tributions are more than $2,000, see Excess Contri-butions, later.) .............................................................. 2,000

7. IRA deduction. Compare lines 4, 5, and 6. Enter thesmallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. (If line 6 is more than line 7 andyou want to make a nondeductible contribution, go toline 8.) .......................................................................... 690

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here and

on line 1 of your Form 8606. ....................................... 1,310



15/85

tax on early distributions as discussed later under EarlyDistributions.

Treat a contribution after the 60-day period as aregular contribution to your IRA. Any part of the contri-bution that is more than the maximum amount youcould contribute may be an excess contribution, asdiscussed later under Excess Contributions.

Extension of rollover period. If an amount distributedto you from a traditional IRA or a qualified employerretirement plan becomes a frozen depositduring the60-day period allowed for a rollover, special rules ex-tend the rollover period.

The period during which the amount is a frozen de-posit is not counted in the 60-day period. The 60-dayperiod cannot end earlier than 10 days after the depositis no longer frozen. To qualify under these rules, thedeposit must be frozen on at least one day during the60-day rollover period.

Frozen deposit. This is any deposit that cannot bewithdrawn from a financial institution because of eitherof the following reasons.

1) The financial institution is bankrupt or insolvent.

2) The state where the institution is located restrictswithdrawals because one or more financial insti-tutions in the state are (or are about to be) bankruptor insolvent.

Rollover From One IRA Into AnotherYou can withdraw, tax free, all or part of the assets fromone traditional IRA if you reinvest them within 60 daysin the same or another traditional IRA. Because this isa rollover, you cannot deduct the amount that you re-invest in an IRA.

TIPYou may be able to treat a contribution madeto one type of IRA as having been made to adifferent type of IRA. This is called recharac-

terizing the contribution. See Recharacterizations inchapter 2 for more information.

Waiting period between rollovers. You can take (re-ceive) a distribution from a traditional IRA and make arollover contribution (of all or part of the amount re-ceived) to a traditional IRA only once in any 1-yearperiod. The 1-year period begins on the date you re-ceive the IRA distribution, not on the date you roll it overinto an IRA. This rule applies separately to each tradi-tional IRA you own.

Example. If you have two traditional IRAs, IRA1and IRA2, and you roll over assets of IRA1 into a newtraditional IRA (IRA3), you may also make a rolloverfrom IRA2 into IRA3, or into any traditional IRA,within 1 year after the rollover distribution from IRA1.These are both allowable rollovers because you havenot received more than one distribution from either IRAwithin 1 year. However, you cannot, within the 1-yearperiod, again roll over the assets you rolled over intoIRA3 into a traditional IRA.

If any amount distributed from a traditional IRA isrolled over tax free, later distributions from that IRA

within a 1-year period will not qualify as rollovers. Theyare taxable and may be subject to the 10% tax on earlydistributions.

Exception. An exception to the 1-year waiting pe-riod rule has been granted by the IRS for distributionsmade from a failed financial institution by the FederalDeposit Insurance Corporation (FDIC) as receiver forthe institution. To qualify for the exception, the distri-bution must satisfy bothof the following requirements.

1) It must notbe initiated by either the custodial insti-tution or the depositor.

2) It must be made because:

a) The custodial institution is insolvent, and

b) The receiver is unable to find a buyer for theinstitution.

The same property must be rolled over. You mustroll over into a traditional IRA the same property youreceived from your traditional IRA.

Partial rollovers. If you withdraw assets from a tradi-tional IRA, you can roll over part of the withdrawal taxfree into a traditional IRA and keep the rest of it. Theamount you keep will generally be taxable (except forthe part that is a return of nondeductible contributions)and may be subject to the 10% tax on premature dis-tributions discussed later under Early Distributions.

Required distributions. Amounts that must be distrib-uted during a particular year under the required distri-bution rules (discussed later) are not eligible forrollovertreatment.

Inherited IRAs. If you inherit a traditional IRA fromyour spouse, you generally can roll it over into a tradi-tional IRA established for you, or you can choose tomake the inherited IRA your own as discussed earlier.See Inherited IRAsunder How Much Can Be Contrib-uted?. Also, see Distributions received by a survivingspouse, later.

Not inherited from spouse. If you inherited a tra-ditional IRA from someone other than your spouse, youcannot roll it over or allow it to receive a rollover con-tribution. You must withdraw the IRA assets within acertain period. For more information, see Beneficiaries,under When Must I Withdraw IRA Assets?, later.

Reporting rollovers from IRAs. Report any rolloverfrom one traditional IRA to the same or another tradi-tional IRA on lines 15a and 15b of Form 1040, or onlines 11a and 11b of Form 1040A. Enter the totalamount of the distribution on line 15a of Form 1040,or on line 11a of Form 1040A. If the total amount on line15a of Form 1040, or on line 11a of Form 1040A wasrolled over, enter zero on line 15b of Form 1040, or online 11b of Form 1040A. Otherwise, enter the taxableportion of the part that was not rolled over on line 15bof Form 1040, or on line 11b of Form 1040A. SeeDistributions Fully or Partly Taxable under Are Distri-butions Taxable?.



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Rollover From Employer's PlanInto an IRAIf you receive an eligible rollover distribution fromyour (or your deceased spouse's) employer's qualifiedpension, profit-sharing or stock bonus plan, annuityplan, or tax-sheltered annuity plan (403(b) plan), youcan roll over all or part of it into a traditional IRA.

A qualified plan is one that meets the requirementsof the Internal Revenue Code.

Eligible rollover distribution. Generally, an eligiblerollover distribution is the taxable part of any distributionof all or part of the balance to your credit in a qualifiedretirement plan except:

1) A required minimum distribution (explained laterunder When Must I Withdraw IRA Assets? (Re-quired Distributions)),

2) Hardship distributions from 401(k) plans and certain403(b) plans, or

3) Any of a series of substantially equal periodic dis-tributions paid at least once a year over:

a) Your lifetime or life expectancy,

b) The lifetimes or life expectancies of you andyour beneficiary, or

c) A period of 10 years or more.

The taxable parts of most other distributions are eligiblerollover distributions. See Maximum rollover, later.Also, see Publication 575 for additional exceptions.

Written explanation to recipients. The administratorof a qualified employer plan must, within a reasonableperiod of time before making an eligible rollover distri-bution, provide you with a written explanation. It musttell you about all of the following.

Your right to have the distribution paid tax free di-rectly to a traditional IRA or another eligible retire-ment plan.

The requirement to withhold tax from the distributionif it is not paid directly to a traditional IRA or anothereligible retirement plan.

The nontaxability of any part of the distribution thatyou roll over to a traditional IRA or another eligibleretirement plan within 60 days after you receive thedistribution.

Other qualified employer plan rules, if they apply,including those for lump-sum distributions, alternatepayees, and cash or deferred arrangements.

The plan administrator must provide you with thiswritten explanation no earlier than 90 days and no laterthan 30 days before the distribution is made.

However, you can choose to have a distributionmade less than 30 days after the explanation is pro-vided as long as bothof the following requirements aremet.

1) You are given at least 30 days after the notice isprovided to consider whether you want to elect adirect rollover.

2) You are given information that clearly states thatyou have this 30-day period to make the decision.

Contact the plan administrator if you have anyquestions regarding this information.

Withholding requirement. If an eligible rollover dis-tribution is paid directly to you, the payer must withhold20% of it. This applies even if you plan to roll over thedistribution to a traditional IRA. You can avoid with-holding by choosing the direct rollover option, discussedlater.

Exceptions. The payer does not have to withhold

from an eligible rollover distribution paid to you if eitherof the following conditions apply.

1) The distribution and all previous eligible rolloverdistributions you received during your tax year fromthe same plan (or, at the payer's option, from allyour employer's plans) total less than $200.

2) The distribution consists solely of employer securi-ties, plus cash of $200 or less in lieu of fractionalshares.

Other withholding rules. The 20% withholding re-

quirement does not apply to distributions that are noteligible rollover distributions. However, other withhold-ing rules apply to these distributions. The rules thatapply depend on whether the distribution is a periodicdistribution or a nonperiodic distribution that is not aneligible rollover distribution. For either of these distri-butions, you can still choose not to have tax withheld.For more information, get Publication 575.

Direct rollover option. Your employer's qualified planmust give you the option to have any part of an eligiblerollover distribution paid directly to a traditional IRA. Theplan is not required to give you this option if your eligible

rollover distributions are expected to total less than$200 for the year.

Withholding. If you choose the direct rollover op-tion, no tax is withheld from any part of the designateddistribution that is directly paid to the trustee of thetraditional IRA.

If any part is paid to you, the payer must withhold20% of that part's taxable amount.

Choosing the right option. The following comparisonchart may help you decide which distribution option tochoose. Carefully compare the effects of each option.



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TIPIf you decide to roll over any part of a distribu-tion, the direct rollover option will generally beto your advantage. This is because you will not

have 20% withholding or be subject to the 10% addi-tional tax under that option.

If you have a lump-sum distribution and do not planto roll over any part of it, the distribution may be eligiblefor special tax treatment that could lower your tax forthe distribution year. In that case, you may want to seePublication 575 and Form 4972, Tax on Lump-Sum

Distributions, and its instructions to determine whetheryour distribution qualifies for special tax treatment and,if so, to figure your tax under the special methods.

You can then compare any advantages from usingForm 4972 to figure your tax on the lump-sum distri-bution with any advantages from rolling over all or partof the distribution. If you roll over any part of thelump-sum distribution, however, you cannot use theForm 4972 special tax treatment for any part of thedistribution.

Maximum rollover. The most you can roll over is thetaxable part of any eligible rollover distribution (definedearlier). The distribution you receive generally will beall taxable unless you have made nondeductible em-ployee contributions to the plan.

Contributions you made to your employer's plan.You cannot roll over a distribution of contributions youmade to your employer's plan, except voluntarydeductible employee contributions (DECs, defined be-low). If you roll over your contributions (other thanDECs), you must treat them as regular (not rollover)contributions and you may have to pay an excesscontributions tax (discussed later) on all or part of them.

DECs. These are voluntary deductible employeecontributions. Prior to January 1, 1987, employeescould make and deduct these contributions to certainqualified employers' plans and government plans.These are not the same as an employee's electivecontributions to a 401(k) plan, which are not deductibleby the employee.

If you receive a distribution from your employer'squalified plan of any part of the balance of your DECsand the earnings from them, you can roll over any partof the distribution.

No waiting period between rollovers. You can makemore than one rollover of employer plan distributionswithin a year. The once-a-year limit on IRA-to-IRArollovers does not apply to these distributions.

IRA as a holding account (conduit IRA) for rolloversto other eligible plans. An IRA qualifies as a conduitIRA if it is a traditional IRA that serves as a holdingaccount or conduit for assets you receive in an eligiblerollover distribution from your first employer's plan. Theconduit IRA must be made up of only those assets andgains and earnings on those assets. A conduit IRA willno longer qualify if you mix regular contributions orfunds from other sources with the rollover distributionfrom your employer's plan.

If you receive an eligible rollover distribution fromyour employer's plan and roll over part or all of it intoone or more conduit IRAs, you can later roll over thoseassets into a new employer's plan.

Property and cash received in a distribution. If youreceive property and cash in an eligible rollover distri-bution, you can roll over either the property or the cash,or any combination of the two that you choose.

Treatment if the same property is not rolled over.Your contribution to a traditional IRA of cash repre-senting the fair market value of property received in adistribution from a qualified retirement plan does not

qualify as a rollover if you keep the property. You musteither roll over the property or sell it and roll over theproceeds, as explained next.

Sale of property received in a distribution from aqualified plan. Instead of rolling over a distribution ofproperty other than cash, you can sell all or part of theproperty and roll over the amount you receive into atraditional IRA. You cannot substitute your own fundsfor property you receive from your employer's retire-ment plan.

Example. You receive a total distribution from youremployer's plan consisting of $10,000 cash and$15,000 worth of property. You decided to keep theproperty. You can roll over to a traditional IRA the$10,000 cash received, but you cannot roll over anadditional $15,000 representing the value of the prop-erty you choose not to sell.

Treatment of gain or loss. If you sell the distributedproperty and roll over all the proceeds into a traditionalIRA, no gain or loss is recognized. The sale proceeds(including any increase in value) are treated as part ofthe distribution and are not included in your gross in-come.

Example. On September 2, Mike received a lump-

sum distribution from his employer's retirement plan of$50,000 in cash and $50,000 in stock. The stock wasnot stock of his employer. On September 24, he soldthe stock for $60,000. On October 4, he rolled over$110,000 in cash ($50,000 from the original distributionand $60,000 from the sale of stock). Mike does notinclude the $10,000 gain from the sale of stock as partof his income because he rolled over the entire amountinto a traditional IRA.

Note. Special rules may apply to distributions ofemployer securities. For more information, get Publi-cation 575.

Comparison Chart

Direct Rollover Payment to You

Payer must withhold income tax of20% on the taxable part.No withholding.

If you are under age 591/2, a 10%additional tax may apply to the taxablepart (including an amount equal to thetax withheld) that is not rolled over.

No 10% additional tax.(See EarlyDistributions, later.)

Any taxable part (including an amount

equal to the tax withheld) not rolled overis income.

Not income until later

distributed to you fromthe IRA.



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Some sales proceeds rolled over. If you roll over partof the amount received from the sale of property, seePublication 575.

Life insurance contract. You cannot roll over a lifeinsurance contract from a qualified plan into a traditionalIRA.

Distributions received by a surviving spouse. If adistribution from an employer's qualified plan or a tax-sheltered annuity is paid to the surviving spouse of adeceased employee, that spouse can roll over into atraditional IRA part or all of any eligible rollover distri-bution (defined earlier). The surviving spouse can alsoroll over all or any part of a distribution of deductibleemployee contributions (DECs).

Distributions under divorce or similar proceedings(alternate payees). If you are the spouse or formerspouse of an employee and you receive a distributionfrom a qualified employer plan as a result of divorceor similar proceedings, you may be able to roll over all

or part of it into a traditional IRA. To qualify, the distri-bution must be:

1) One that would have been an eligible rollover dis-tribution (defined earlier) if it had been made to theemployee, and

2) Made under a qualified domestic relations order.

Qualified domestic relations order. A domesticrelations order is a judgment, decree, or order (includ-ing approval of a property settlement agreement) thatis issued under the domestic relations law of a state.

A qualified domestic relations order gives to an alter-nate payee (a spouse, former spouse, child, or de-pendent of a participant in a retirement plan) the rightto receive all or part of the benefits that would be pay-able to a participant under the plan. The order requirescertain specific information, and it cannot alter theamount or form of the benefits of the plan.

Tax treatment if all of an eligible distribution is notrolled over. Any part of an eligible rollover distributionthat you keep is taxable in the ye

us internal revenue service: p590--2000

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